US Federal Reserve Chairman Kevin Warsh at a recent press conference in Washington, D.C., U.S. J | Photo Credit: EVELYN HOCKSTEIN

The Federal Open Markets Committee took many by mild surprise, when it retained rates at 3.5-3.75 per cent in the face of persistent inflation (well above the 2 per cent target since 2021, and now at 3.5 per cent in June). A 25 per cent hike was expected last week; a pause now probably raises the chances of a hike in September unless the main factors driving price rise — read Iran war — recede all of a sudden. Nevertheless, the Fed chair Kevin Warsh insisted that he was dead serious about inflation.

As the Monetary Policy Committee meets this week, its members would be relieved that the FOMC did not raise rates. India has just come off a month where foreign inflows have been positive in the wake of a slew of policies to attract NRI and other investment. A hike would likely have complicated currency management at a time when oil prices are hardening all over again and pressurising the rupee. Meanwhile, Warsh is faced with a difficult task of reconciling a medley of concerns arising out of inflation, growth, currency markets and asset markets. The importance of the last factor should not be underestimated. US’ equity markets (S&P 500) have risen above 9 per cent this year — with AI and technology stocks leading this run, amidst fears of these companies making huge investments on leverage. An interest rate hike could trigger a repricing of debt and assets, impacting financial stability, customer wealth and the value of the dollar. Last week’s meltdown in South Korea’s equity market, led by AI stocks, is instructive. Monetary policy the world over would be guided as much by financial stability as growth-inflation dynamics. India’s markets are quite unaffected, because of minimal AI presence. The MPC can stick to its script. It can keep rates steady, while watching for inflation and volatility.

As for Fed’s ambivalence, the dollar has already been strong this calendar year on account of war-induced safe haven demand, and perhaps expectations of higher short-term yields. A strong dollar reduces import costs, but beyond a point this appreciation can render exports uncompetitive. There is a bit of uncertainty over growth as well, with the US Bureau of Economic Analysis reporting advance estimates of Q2 growth for this calendar year at just 1.5 per cent (2.1 per cent in Q1). Meanwhile, labour data is a bit flat, with the employment rate holding up because of those who quit the job market. On the other side of the scale, July inflation is likely to exceed June’s 3.5 per cent, as Brent crude prices surged 22 per cent over the month ($71 to $88 a barrel) on resumption of hostilities between US and Iran. Oil prices fell about 20 per cent in June.

When Warsh said he would refrain from forward guidance (to anchor inflation expectations), he was possibly expecting the war and its shocks to abate — and held back a hike. Bond yields have stiffened at the long end, nevertheless. Whether that leaves Fed behind the curve remains to be seen, as President Trump pushes for an easy money policy.

Published on August 2, 2026